Netflix shares rise on Wal-Mart deal

DVD rental company shores up its market position

DanBurrows

DavidB. Wilkerson

NEW YORK (MarketWatch) -- Shares of Netflix Inc. rose Thursday after Wal-Mart Stores Inc. said it's abandoning its own DVD rental service to partner with the online movie-rental company.

In response, Netflix rival Blockbuster Inc.
BBI, +1.85%
said it is offering two months of free service to Walmart.com and Netflix subscribers who switch their membership to Blockbuster's online DVD rental plan. Customers who switch would also receive a free retail DVD of their choice, and a chance to subscribe to Blockbuster Online at their current Walmart.com or Netflix price for the next year.

Netflix
NFLX, -0.78%
rose 63 cents, or 4%, to close at $16.13. The stock had traded as high as $19.27 just after the market opened Thursday.

However, Netflix said the Wal-Mart deal won't materially contribute to its financial results and said it is maintaining its financial estimates.

Wal-Mart
WMT, -0.60%
the world's largest retailer, will offer existing subscribers of Walmart.com's DVD rental service an option to become Netflix subscribers at the current Wal-Mart rate for one year.

In turn, Netflix will promote the Bentonville, Ark., retailer's online movie-sales business. Wal-Mart, a component of the Dow Jones Industrial Average, declined 7 cents to $47.51. Blockbuster gave back 4 cents to $9.74.

"There had been a big fear that Wal-Mart would get up one day and say, 'We really want this [online rental] business,' and start throwing money at it, " said Dennis McAlpine, president of McAlpine Associates, Scarsdale, N.Y. "What this deal has done is to basically eliminate a sleeping giant before it wakes up."

ComScore Media Metrix said Thursday that according to its statistics, 1.8 million consumers visited both Wal-Mart and Netflix in the month of April.

Of Netflix visitors, 21% also visited Walmart.com, while 9% of Walmart.com visitors logged on to Netflix in April, ComScore said.

The deal with Wal-Mart isn't exclusive, Netflix Chief Executive Reed Hastings said in an interview. He declined to comment on whether Netflix would be interested in a partnership with Amazon.com
AMZN, +0.06%
which has entered the online DVD rental market overseas.

Hastings said he approached John Fleming, Walmart.com's chief executive, about an alliance. "I had bought a lot of DVDs from Wal-Mart as Christmas presents," he said. See Bambi Francisco's Net Stocks.

Issuing its outlook following the release of first-quarter results, Netflix said last month it expects second-quarter revenue of between $160 million and $165 million. For the year, revenue is seen in the range of $660 million to $685 million, down from its earlier forecast of $700 million to $730 million.

The Blockbuster angle

The company explained that it has been forced to ramp up spending on marketing in 2005 because Blockbuster, the market-share leader in video rentals, has made a major foray into online rentals.

There has been speculation about whether Blockbuster will raise its price for unlimited online monthly rentals, amid published reports Wednesday that it is testing a fee of $18, against the current price of $14.99.

Thursday's immediate response from Blockbuster after the Netflix-Wal-Mart deal was announced suggests that it is "not easing off the pedal" in its competition with Netflix, says Matt Ragas, co-editor of FindProfit.com. He added that the counterplay is "smart."

Netflix, in anticipation of a move from Blockbuster, last year cut its basic subscription price to $17.99 a month from $21.99. Blockbuster in December cut its monthly price to $14.99 from $17.49.

Netflix chose not to try to match that cut. Its basic subscription price remains $17.99 for as many DVDs as a customer wants, in exchange for the right to take out up to three movies at any one time. The company has a library that includes more than 40,000 titles.

Ragas said it isn't clear whether a newly elected slate of Blockbuster board members, led by dissident shareholder Carl Icahn, is behind the possible Blockbuster price increase. See related story.

"Granted, Icahn's in there now, and he thinks they're overspending, and so forth. But the company has retained the same CEO. So until you see the CEO leave, it's hard to believe there's going to be that much of a strategy shift," Ragas said.

A Blockbuster spokesman wasn't immediately available for comment Thursday.

In a war that rolled on for months, Icahn, Blockbuster's largest individual shareholder, accused Chief Executive John Antioco of putting the company on a "spending spree," while taking an exorbitant pay package. Antioco countered that the company has been taking the necessary steps to maintain its leading market share in a rapidly changing video market.

In addition to boosting marketing spending on a per-subscriber basis in its battle with Blockbuster, Netflix will offer subscribers a choice of plans when they sign up. These include a $9.99 plan that lets users take out one disc at a time, and a plan that lets customers take out two discs at once for $11.99 a month.

Though these plans have been offered for some time, they hadn't been offered at sign-up. While this means the average selling price of its subscriptions will decline, Netflix expects to take in higher gross margins from the lower-priced plans.

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